UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C FORM 10 Q

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1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C FORM 10 Q (Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended February 28, TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 or For the transition period from to Commission file number Neogen Corporation (Exact name of registrant as specified in its charter) Michigan (State or other jurisdiction of incorporation or organization) 620 Lesher Place Lansing, Michigan (Address of principal executive offices, including zip code) (517) (Registrant s telephone number, including area code) (IRS Employer Identification Number) N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. YES NO

2 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S T ( of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES NO Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non accelerated filer (see definition of accelerated filer and large accelerated filer in Rule 12b 2 of the Exchange Act): Large accelerated filer Accelerated filer Non accelerated filer (Do not check if a smaller reporting company) Smaller reporting company Emerging growth company If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transaction period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b 2 of the Exchange Act): YES NO As of February 28, 2018, there were 51,583,085 shares of Common Stock outstanding.

3 NEOGEN CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Page No. Item 1. Interim Consolidated Financial Statements (unaudited) 2 Consolidated Balance Sheets February 28, 2018 and May 31, Consolidated Statements of Income Three and nine months ended February 28, 2018 and Consolidated Statements of Comprehensive Income Three and nine months ended February 28, 2018 and Consolidated Statement of Equity Nine months ended February 28, Consolidated Statements of Cash Flows Nine months ended February 28, 2018 and Notes to Interim Consolidated Financial Statements February 28, Item 2. Management s Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk 20 Item 4. Controls and Procedures 20 PART II. OTHER INFORMATION Item 1. Legal Proceedings 21 Item 6. Exhibits 21 SIGNATURES 22 Certification of Principal Executive Officer Certification of Principal Financial Officer Section 906 Certification 1

4 PART I FINANCIAL INFORMATION Item 1. Interim Consolidated Financial Statements Neogen Corporation and Subsidiaries Consolidated Balance Sheet (in thousands, except share and per share amounts) February 28, 2018 (Unaudited) May 31, 2017 (Audited) Assets Current Assets Cash and cash equivalents $ 82,066 $ 77,567 Marketable securities (at fair value, which approximates cost) 110,089 66,068 Accounts receivable, less allowance of $1,750 and $2,000 73,209 68,576 Inventories, net 77,506 73,144 Prepaid expenses and other current assets 9,334 7,606 Total Current Assets 352, ,961 Property and Equipment, net 72,514 61,748 Other Assets Goodwill 99, ,759 Other non amortizable intangible assets 15,011 14,323 Customer based intangibles, net of accumulated amortization of $23,846 and $20,846 at February 28, 2018 and May 31, ,518 35,983 Other non current assets, net of accumulated amortization of $11,893 and $9,931 at February 28, 2018 and May 31, ,876 18,635 Total Assets $ 595,601 $528,409 Liabilities and Equity Current Liabilities Accounts payable $ 19,654 $ 16,244 Accrued compensation 5,469 5,002 Income taxes Other accruals 11,210 13,820 Total Current Liabilities 37,293 36,002 Deferred Income Taxes 11,400 17,048 Non Current Liabilities 4,973 3,602 Total Liabilities 53,666 56,652 Commitments and Contingencies (note 9) Equity Preferred stock, $1.00 par value, 100,000 shares authorized, none issued and outstanding Common stock, $0.16 par value, 60,000,000 shares authorized, 51,583,085 and 50,932,489 shares issued and outstanding at February 28, 2018 and May 31, 2017, respectively 8,253 8,149 Additional paid in capital 197, ,742 Accumulated other comprehensive loss (5,303) (7,203) Retained earnings 341, ,926 Total Neogen Corporation Stockholders Equity 541, ,614 Non controlling interest Total Equity 541, ,757 Total Liabilities and Equity $ 595,601 $528,409 2 See notes to interim consolidated financial statements.

5 Neogen Corporation and Subsidiaries Consolidated Statements of Income (unaudited) (in thousands, except per share amounts) Three Months Ended Nine Months Ended February 28, February 28, Revenues Product revenues $78,142 $73,964 $244,298 $223,170 Service revenues 17,750 14,421 48,667 39,577 Total Revenues 95,892 88, , ,747 Cost of Revenues Cost of product revenues 40,352 38, , ,241 Cost of service revenues 10,019 8,689 27,517 24,556 Total Cost of Revenues 50,371 47, , ,797 Gross Margin 45,521 40, , ,950 Operating Expenses Sales and marketing 17,492 15,340 52,331 45,824 General and administrative 9,280 8,548 29,096 25,094 Research and development 2,836 2,641 8,901 8,087 Total Operating Expenses 29,608 26,529 90,328 79,005 Operating Income 15,913 14,351 50,335 45,945 Other Income Interest income , Other income 844 1,105 1,913 1,098 Total Other Income 1,368 1,376 3,235 1,788 Income Before Taxes 17,281 15,727 53,570 47,733 Provision for Income Taxes 700 5,350 7,900 16,250 Net Income 16,581 10,377 45,670 31,483 Net (Income)/Loss Attributable to Non Controlling Interest 5 (90) (70) (163) Net Income Attributable to Neogen $16,586 $10,287 $ 45,600 $ 31,320 Net Income Attributable to Neogen Per Share Basic $ 0.32 $ 0.20 $ 0.89 $ 0.62 Diluted $ 0.32 $ 0.20 $ 0.88 $ See notes to interim consolidated financial statements.

6 Neogen Corporation and Subsidiaries Consolidated Statements of Comprehensive Income (unaudited) (in thousands) Three Months Ended Nine Months Ended February 28, February 28, Net Income $16,581 $10,377 $45,670 $31,483 Other comprehensive income (loss), net of tax: currency translation adjustments 1, ,900 (3,743) Comprehensive income 17,744 10,818 47,570 27,740 Comprehensive loss (income) attributable to non controlling interest 5 (90) (70) (163) Comprehensive income attributable to Neogen $17,749 $10,728 $47,500 $27,577 4 See notes to interim consolidated financial statements.

7 Neogen Corporation and Subsidiaries Consolidated Statement of Equity (unaudited) (in thousands) Accumulated Additional Other Non Common Stock Paid in Comprehensive Retained controlling Shares Amount Capital Income (Loss) Earnings Interest Total Balance, May 31, ,932 $8,149 $174,742 $ (7,203) $295,926 $ 143 $471,757 Issuance of shares under share based compensation plan ,456 21,557 Issuance of shares under employee stock purchase plan ,048 1,051 Conversion of minority interest to retained earnings (67) 67 Net income for the nine months ended February 28, , ,670 Other comprehensive income 1,900 1,900 Balance February 28, ,583 $8,253 $197,246 $ (5,303) $341,459 $ 280 $541,935 5 See notes to interim consolidated financial statements.

8 Neogen Corporation and Subsidiaries Consolidated Statements of Cash Flows (unaudited) (in thousands) Nine Months Ended February 28, Cash Flows From Operating Activities Net Income $ 45,670 $ 31,483 Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization 12,682 10,691 Share based compensation 3,692 3,932 Excess income tax benefit from the exercise of stock options (see note 5) (3,671) Change in operating assets and liabilities, net of business acquisitions: Accounts receivable (4,013) 5,916 Inventories (3,859) (9,460) Prepaid expenses and other current assets (7,316) 717 Accounts payable, accruals and other changes (280) 5,580 Net Cash Provided By Operating Activities 46,576 45,188 Cash Flows Used In Investing Activities Purchases of property, equipment and other non current intangible assets (16,297) (13,002) Proceeds from the sale of marketable securities 211, ,957 Purchases of marketable securities (255,348) (115,117) Business acquisitions, net of cash acquired (468) (34,027) Net Cash Used In Investing Activities (60,786) (59,189) Cash Flows From Financing Activities Exercise of stock options 18,916 15,844 Excess income tax benefit from the exercise of stock options 3,671 Net Cash Provided By Financing Activities 18,916 19,515 Effect of Exchange Rates on Cash (207) (888) Net Increase In Cash and Cash Equivalents 4,499 4,626 Cash And Cash Equivalents At Beginning Of Period 77,567 55,257 Cash And Cash Equivalents At End Of Period $ 82,066 $ 59,883 6 See notes to interim consolidated financial statements.

9 1. BASIS OF PRESENTATION NEOGEN CORPORATION AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (generally accepted accounting principles) for interim financial information and with the instructions to Form 10 Q and Article 10 of Regulation S X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the three and nine month periods ended February 28, 2018 are not necessarily indicative of the results to be expected for the fiscal year ending May 31, For more complete financial information, these consolidated financial statements should be read in conjunction with the May 31, 2017 audited consolidated financial statements and the notes thereto included in the Company s Annual Report on Form 10 K for the year ended May 31, INVENTORIES Inventories are stated at the lower of cost, determined on the first in, first out method, or net realizable value. The components of inventories follow: February 28, 2018 May 31, 2017 (in thousands) Raw materials $ 35,774 $33,190 Work in process 6,231 4,831 Finished and purchased goods 35,501 35,123 $ 77,506 $73, NET INCOME PER SHARE The calculation of net income per share attributable to Neogen Corporation follows: Three Months Ended February 28, Nine Months Ended February 28, (in thousands, except per share amounts) Numerator for basic and diluted net income per share: Net income attributable to Neogen $16,586 $10,287 $45,600 $31,320 Denominator for basic net income per share: Weighted average shares 51,537 50,746 51,253 50,438 Effect of dilutive stock options Denominator for diluted net income per share 52,237 51,379 52,014 51,161 Net income attributable to Neogen per share: Basic $ 0.32 $ 0.20 $ 0.89 $ 0.62 Diluted $ 0.32 $ 0.20 $ 0.88 $ 0.61 The Board of Directors declared a 4 for 3 stock split effective December 29, All share and per share amounts in this Form 10 Q reflect amounts as if the split took place at the beginning of the periods presented. 7

10 4. SEGMENT INFORMATION The Company has two reportable segments: Food Safety and Animal Safety. The Food Safety segment is primarily engaged in the development, production and marketing of diagnostic test kits, culture media and related products used by food producers and processors to detect harmful natural toxins, foodborne bacteria, allergens and levels of general sanitation. The Animal Safety segment is primarily engaged in the development, production and marketing of products dedicated to animal safety, including a complete line of consumable products marketed to veterinarians and animal health product distributors; this segment also provides genomic identification and related interpretive bioinformatic services. Additionally, the Animal Safety segment produces and markets rodenticides, cleaners, disinfectants and insecticides to assist in the control of rodents, insects and disease in and around agricultural, food production and other facilities. Neogen s international operations in the United Kingdom, Mexico, Brazil, China, and India originally focused on the Company s Food Safety products, and each of these units reports through the Food Safety segment. In recent years, these operations have expanded to offer the Company s complete line of products and services, including those usually associated with the Animal Safety segment such as cleaners, disinfectants, rodenticides, insecticides, veterinary instruments and genomic services. These additional products and services are managed and directed by existing management, and are reported through the Food Safety segment. The accounting policies of each of the segments are the same as those described in Note 1. Segment information follows: Food Safety Animal Safety (in thousands) Corporate and Eliminations (1) Total As of and for the three months ended February 28, 2018 Product revenues to external customers $ 42,618 $ 35,524 $ $ 78,142 Service revenues to external customers 5,027 12,723 17,750 Total revenues to external customers 47,645 48,247 95,892 Operating income (loss) 8,258 8,493 (838) 15,913 Total assets 188, , , ,601 As of and for the three months ended February 28, 2017 Product revenues to external customers $ 39,318 $ 34,646 $ $ 73,964 Service revenues to external customers 3,631 10,790 14,421 Total revenues to external customers 42,949 45,436 88,385 Operating income (loss) 7,403 7,743 (795) 14,351 Total assets 183, , , ,298 8

11 Food Safety Animal Safety Corporate and Eliminations (1) Total (in thousands) For the nine months ended February 28, 2018 Product revenues to external customers $129,621 $114,677 $ $244,298 Service revenues to external customers 14,319 34,348 48,667 Total revenues to external customers 143, , ,965 Operating income (loss) 25,704 27,691 (3,060) 50,335 For the nine months ended February 28, 2017 Product revenues to external customers $112,592 $110,578 $ $223,170 Service revenues to external customers 10,475 29,102 39,577 Total revenues to external customers 123, , ,747 Operating income (loss) 24,286 24,616 (2,957) 45,945 (1) Includes corporate assets, consisting principally of cash and cash equivalents, marketable securities, current and deferred tax accounts and overhead expenses not allocated to specific business segments. Also includes the elimination of intersegment transactions. 9

12 5. EQUITY COMPENSATION PLANS Qualified and non qualified options to purchase shares of common stock may be granted to directors, officers and employees of the Company under the terms of the Company s stock option plans. These options are granted at an exercise price of not less than the fair market value of the stock on the date of grant. Options vest ratably over three and five year periods and the contractual terms are generally five or ten years. A summary of stock option activity during the nine months ended February 28, 2018 follows: Shares Weighted Average Exercise Price (in thousands) Options outstanding June 1, ,708 $ Granted Exercised (668) Forfeited (144) Options outstanding February 28, , During the three and nine month periods ended February 28, 2018 and 2017, the Company recorded $1,026,000 and $1,198,000 and $3,692,000 and $3,932,000, respectively, of compensation expense related to its share based awards. On June 1, 2017, the Company adopted ASU No , which simplifies the accounting for share based payments to employees. The guidance requires the recognition of the income effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid in capital pools. The guidance also allows for a policy election to account for forfeitures as they occur, rather than on an estimated basis, and requires that excess tax benefits be classified as an operating activity on the Statement of Cash Flows. The adoption of this ASU increased income tax expense by $331,000 for the three months ended February 28, 2018 as the reduction in the corporate tax rate from the tax reform enacted in December 2017 resulted in a partial reversal of tax benefit previously recorded at the higher corporate rate in the first and second quarters of the current fiscal year; year to date, income tax expense decreased by $3,463,000 as a result of adoption of the ASU. The weighted average fair value per share of stock options granted during fiscal 2018 and fiscal 2017, estimated on the date of grant using the Black Scholes option pricing model, was $14.44 and $11.84, respectively. The fair value of stock options granted was estimated using the following weighted average assumptions: FY 2018 FY 2017 Risk free interest rate 1.6% 1.2% Expected dividend yield 0.0% 0.0% Expected stock price volatility 27.7% 35.2% Expected option life 4.0 years 4.0 years The Company has an employee stock purchase plan that provides for employee stock purchases at a 5% discount to market price. The discount is recorded in administrative expense as of the date of purchase. 6. NEW ACCOUNTING PRONOUNCEMENTS In May 2014, the FASB issued ASU No Revenue from Contracts with Customers (Topic 606). The new standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry specific guidance. The core principle of the revenue model is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard is designed to create greater comparability for financial statement users across industries and jurisdictions and also requires enhanced disclosures. In April 2016, the FASB issued Accounting Standards Update No Revenue from Contracts with Customers (Topic 606), which amends and adds clarity to certain aspects of the guidance set forth in ASU related to identifying performance obligations and licensing. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, The guidance permits two methods of adoption: a full retrospective method to each prior reporting period presented or a modified retrospective approach with the cumulative effect of initially applying the guidance recognized at the date of initial application. The Company has formed an internal team to implement the new standard. This team has identified all revenue streams at each significant subsidiary and is currently reviewing contracts to evaluate the potential impact of adopting the new standard on the Company s revenue recognition policies, procedures and control framework and ultimately on the Company s consolidated financial statements and related disclosures. The Company will adopt this ASU on June 1, 2018 using the modified retrospective approach. 10

13 In February 2016, the FASB issued ASU No Leases to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right of use asset representing its right to use the underlying asset for the lease term. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessor have not significantly changed from previous U.S. GAAP. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018; early adoption is permitted. Modified retrospective application is permitted with certain practical expedients. The Company expects to adopt this ASU on June 1, 2019 and is currently in the process of evaluating its lessee and lessor arrangements to determine the impact of this amendment on its consolidated financial condition and results of operations. This evaluation includes a review of revenue through leasing arrangements as well as lease expenses, which are primarily through operating lease arrangements at most of the Company s facilities. In March 2016, the FASB issued ASU No Compensation Stock Compensation (Topic 718): Improvements to Employee Share Based Payment Accounting to provide guidance that changes the accounting for certain aspects of share based payments to employees. The guidance requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid in capital pools. The guidance also allows for the employer to repurchase more of an employee s shares for tax withholding purposes without triggering liability accounting. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. The Company adopted this standard effective June 1, Adoption of this ASU increased income tax expense by $331,000 for the three months ended February 28, 2018 as the reduction in the corporate tax rate from the tax reform enacted in December 2017 resulted in a partial reversal of tax benefit previously recorded at the higher corporate rate in the first and second quarters of the current fiscal year; year to date, income tax expense decreased by $3,463,000 as a result of adoption of the ASU. In June 2016, the FASB issued ASU No Measurement of Credit Losses on Financial Instruments, which changes how companies measure credit losses on most financial instruments measured at amortized cost and certain other instruments, such as loans, receivables and held to maturity debt securities. Rather than generally recognizing credit losses when it is probable that the loss has been incurred, the revised guidance requires companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost the Company expects to collect over the instrument s contractual life. ASU is effective for fiscal periods beginning after December 15, 2019 and must be adopted as a cumulative effect adjustment to retained earnings. Early adoption is permitted. The Company does not believe the adoption of this guidance will have an impact on its consolidated financial statements. In August 2016, the FASB issued ASU No Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force). The amendments in ASU address eight specific cash flow issues and apply to all entities that are required to present a statement of cash flows under FASB Accounting Standards Codification (FASB ASC) 230, Statement of Cash Flows. The amendments in ASU are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption during an interim period. The Company has not yet adopted this update and is currently evaluating the impact of ASU No on its consolidated financial statements. 7. BUSINESS AND PRODUCT LINE ACQUISITIONS The Consolidated Statements of Income reflect the results of operations for business acquisitions since the respective dates of purchase. All are accounted for using the acquisition method. Goodwill recognized in the acquisitions discussed below relates primarily to enhancing the Company s strategic platform for the expansion of available product offerings. On December 1, 2016, the Company acquired the stock of Quat Chem Ltd., a chemical company that manufactures biosecurity products, based in Rochdale, England. Consideration for the purchase was $21,606,000 in cash and up to $3,778,000 of contingent consideration, due at the end of each of the first two years, based on an excess net sales formula. The final purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included accounts receivable of $4,684,000, inventory of $1,243,000, land, property and equipment of $2,526,000, accounts payable of $2,197,000, deferred tax liability of $1,133,000, contingent consideration accrual of $1,058,000, other current liabilities of $604,000, non amortizable intangible assets of $1,889,000, intangible assets of $6,900,000 (with an estimated life of 5 15 years) and the remainder to goodwill (non deductible for tax purposes). These values are Level 3 fair value measurements. In January 2018, the Company paid the former owners $249,000 in contingent consideration based on the achievement of sales targets in the first year, and recorded a credit of $255,000 to other income, reducing the contingent consideration accrual by a corresponding amount; $554,000 remains accrued for contingent consideration payable at the end of the second year. This business continues to operate in its current location and is managed by Neogen Europe, reporting within the Food Safety segment. 11

14 On December 27, 2016, the Company acquired the stock of Rogama Industria e Comercio, Ltda., a company that develops and manufactures rodenticides and insecticides, based near Sao Paulo, Brazil. Consideration for the purchase was $12,428,000 in cash and up to $2,069,000 of contingent consideration, due at the end of each of the first two years, based on an excess net sales formula. The final purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included accounts receivable of $1,866,000, other non current assets of $26,000, inventory of $960,000, land, property and equipment of $4,734,000, current liabilities of $2,562,000, contingent consideration accrual of $213,000, non current deferred tax liability of $1,307,000, non amortizable intangible assets of $870,000, intangible assets of $5,112,000 (with an estimated life of 5 15 years) and the remainder to goodwill (non deductible for tax purposes). These values are Level 3 fair value measurements. This business continues to operate in its current location and is managed by Neogen do Brasil, reporting within the Food Safety segment. On September 1, 2017, the Company acquired the assets of The University of Queensland Animal Genetics Laboratory, an animal genomics laboratory located near Brisbane, Australia. This acquisition is intended to accelerate the growth of the Company s animal genomics business in Australia and New Zealand. Consideration for the purchase was $2,063,000; $468,000 has been paid in cash with the remainder due in annual installments over the next five years. The preliminary purchase price allocation included inventory of $19,000, equipment of $419,000, non current liabilities of $1,629,000, intangible assets of $850,000 (with an estimated life of 5 15 years) and the remainder to goodwill (non deductible for tax purposes). These values are Level 3 fair value measurements. The new business, renamed Neogen Australasia, continues to operate in its current location, reporting within the Animal Safety segment. 8. LONG TERM DEBT The Company has a financing agreement with a bank providing for an unsecured revolving line of credit of $15,000,000, which expires on September 30, There were no advances against the line of credit during fiscal year 2017 and there have been none thus far in fiscal year 2018; there was no balance outstanding at February 28, Interest on any borrowings remained at LIBOR plus 100 basis points (rate under the terms of the agreement was 2.82% at February 28, 2018). Financial covenants include maintaining specified levels of tangible net worth, debt service coverage, and funded debt to EBITDA, each of which the Company was in compliance with at February 28, COMMITMENTS AND CONTINGENCIES The Company is involved in environmental remediation and monitoring activities at its Randolph, Wisconsin, manufacturing facility and accrues for related costs when such costs are determined to be probable and estimable. The Company expenses annual costs of remediation, which have ranged from $38,000 to $57,000 per year over the past five years. The Company s estimated liability for these costs was $916,000 at February 28, 2018 and May 31, 2017, measured on an undiscounted basis over an estimated period of 15 years; $54,000 of the liability is recorded within current liabilities and the remainder is recorded within other non current liabilities in the consolidated balance sheet. The Company is subject to certain legal and other proceedings in the normal course of business that, in the opinion of management, should not have a material effect on its future results of operations or financial position. 10. STOCK PURCHASE The Company has a stock repurchase program, authorized by the Board of Directors in calendar year 2008, to purchase, subject to market conditions, up to 1,500,000 shares of the Company s common stock. As of February 28, 2018, 1,350,632 shares were available to be repurchased under the program. There were no purchases in fiscal year 2017 and there have been none thus far in fiscal year

15 PART I FINANCIAL INFORMATION Item 2. Management s Discussion and Analysis of Financial Condition and Results of Operations The information in this Management s Discussion and Analysis of Financial Condition and Results of Operations contains both historical financial information and forward looking statements. Neogen does not provide forecasts of future financial performance. While management is optimistic about the Company s long term prospects, historical financial information may not be indicative of future financial results. Safe Harbor and Forward Looking Statements Forward looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, are made throughout this Quarterly Report on Form 10 Q. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward looking statements. Without limiting the foregoing, the words believes, anticipates, plans, expects, seeks, estimates, and similar expressions are intended to identify forward looking statements. There are a number of important factors, including competition, recruitment and dependence on key employees, impact of weather on agriculture and food production, identification and integration of acquisitions, research and development risks, patent and trade secret protection, government regulation and other risks detailed from time to time in the Company s reports on file at the Securities and Exchange Commission, that could cause Neogen Corporation s results to differ materially from those indicated by such forward looking statements, including those detailed in this Management s Discussion and Analysis of Financial Condition and Results of Operations. In addition, any forward looking statements represent management s views only as of the day this Quarterly Report on Form 10 Q was first filed with the Securities and Exchange Commission and should not be relied upon as representing management s views as of any subsequent date. While management may elect to update forward looking statements at some point in the future, it specifically disclaims any obligation to do so, even if its views change. Critical Accounting Policies and Estimates The discussion and analysis of the Company s financial condition and results of operations are based on the consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires that management make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates the estimates, including, but not limited to, those related to receivable allowances, inventories, accruals, goodwill and other intangible assets. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There were no significant changes to the contractual obligations or contingent liabilities and commitments disclosed in the Company s Annual Report on Form 10 K for the fiscal year ended May 31, The Company adopted ASU No related to share based compensation on June 1, (See Note 5 Equity Compensation Plans for further discussion). On December 22, 2017, the Tax Cuts and Jobs Act, ( the Tax Act ) was enacted. Among the significant changes to the U.S. Internal Revenue Code, the Tax Act lowers the U.S. federal corporate income tax rate ( Federal Tax Rate ) from 35% to 21% effective January 1, The Company will compute its income tax for the fiscal year ending May 31, 2018 using a blended Federal Tax Rate of 29.2%. In December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118, which addresses how a company recognizes provisional amounts when a company does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes in the Tax Act. The measurement period ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year. As of February 28, 2018, the Company was able to determine a reasonable estimate for certain effects of tax reform and recorded that estimate as a provisional amount. The provisional remeasurement of the deferred tax assets and liabilities resulted in a $5.6 million discrete tax benefit. In addition, the Company was required to estimate its cumulative unrepatriated foreign earnings and profits and 13

16 calculate estimated tax owed on those earnings and profits; this tax was provisionally estimated at $2.7 million. The provisional remeasurement and repatriation amounts are anticipated to change as more data becomes available allowing more accurate computations of the amounts. There have been no other material changes to the critical accounting policies and estimates disclosed in the Company s Annual Report on Form 10 K for the fiscal year ended May 31,

17 Executive Overview Revenues for the Company for the third quarter ended February 28, 2018 were $95.9 million, an increase of 8%, or $7.5 million, compared to revenues of $88.4 million for the same period in the prior year. For the year to date period, revenues were $293.0 million, an increase of 12%, or $30.3 million, compared to revenues of $262.7 million in the first nine months of fiscal year Net income attributable to Neogen for the third quarter of fiscal 2018 increased 61% to $16.6 million, compared to $10.3 million in the third quarter of fiscal year Earnings per share for the third quarter of fiscal 2018 were $0.32 compared to $0.20 per share in the same period a year ago. Net earnings for the third quarter were favorably impacted by adjustments resulting from tax reform legislation enacted in December For the first nine months of the current fiscal year, net income attributable to Neogen increased 46% to $45.6 million, or $0.88 per fully diluted share, compared to $31.3 million, or $0.61, for the same period in the prior fiscal year. For the year to date period, net earnings were favorably impacted by tax reform, excess tax benefits from stock option exercises, and the favorable conclusion of an IRS audit. Food Safety segment revenues increased 11% and Animal Safety segment revenues increased 6% for the three month period ended February 28, 2018, each compared to the same period in the prior year. For the quarter, the overall organic sales increase was 7%; organic growth in the Food Safety and Animal Safety segments was 9% and 5%, respectively. The acquisitions of Rogama, purchased in mid December 2016, and Neogen Australasia, in September 2017, contributed $1.6 million to the overall revenue growth in the third quarter. Food Safety segment revenues increased 17% and Animal Safety segment revenues increased 7% for the year to date period. Overall organic sales increased 7% for the year to date period; the organic increases were 9% for the Food Safety segment and 6% for the Animal Safety segment. The previously discussed acquisitions, and Quat Chem, purchased on December 1, 2016, contributed $11.1 million to the overall sales increase for the nine month period. International sales were $37.4 million in the third quarter of fiscal 2018, an increase of 17% compared to the same period in the prior year. Expressed as a percentage of sales, international sales were 39.0% in the quarter, compared to 36.3% in the third quarter a year ago. For the year to date, international sales were $110.5 million, an increase of 20%; international sales were 37.7% of total sales in the current year to date period and 35.1% in the prior year. For each comparative period, international revenue increases were the result of the acquisitions of Quat Chem (England), Rogama (Brazil) and Neogen Australasia (Australia), and to a lesser extent, revenue increases at existing Company locations. Currency translation had a positive effect on international revenues of approximately $1.9 million in the third quarter of fiscal 2018 as the pound, euro, and peso were stronger on average against the dollar than the same period a year ago; for the year to date period, the positive revenue impact was $2.5 million. Revenues at Neogen Europe increased 16% in U.S. dollars in the third quarter compared to the same period in the prior year; for the nine month period, sales rose 10%. For the quarter, a 39% increase in genomics revenues offset lower mycotoxin test kit sales, as last year s deoxynivalenol (DON) outbreak in corn crops in western Europe did not repeat in the current year. For the year to date period, genomics sales increased 34% and helped to offset lower DON test kit sales. Sales at Lab M, the Company s subsidiary in England, increased 20% in the third quarter and 25% for the nine month period, as its culture media products continued to be integrated into Neogen s global sales and marketing channels. Neogen Latinoamerica recorded a sales increase of 19% in the third quarter; Food Safety products increased 21% and Animal Safety products increased 17%, with broad based gains recorded in both categories. For the year to date, revenues rose 18%, with Food Safety products and increases in genomics services providing the majority of the increase. Revenues at Neogen do Brasil declined 2% in the year s third quarter, as a decrease in forensic test kit sales resulting from increased competition and customer losses caused by conversion to different testing methods more than offset increased sales of mycotoxin and dairy drug residue test kits. For the year to date, revenues increased 18%. Neogen China sales increased 28% in the third quarter and 21% for the year to date period, each compared to the same periods in the prior year; for each period, increases were driven by strength in genomics services and animal safety products. Revenues for Neogen India declined 37% for the quarter, as a large cleaner and disinfectant order in the prior year s third quarter did not repeat; for the year to date, revenues were flat, as higher sales of Food Safety products and testing services were almost entirely offset by the cleaner and disinfectant revenue from last year s third quarter which did not repeat this year. Service revenue was $17.8 million in the quarter ended February 28, 2018, an increase of $3.4 million, or 24%, compared to $14.4 million in the third quarter of the prior year. For the year to date period, service revenue was $48.7 million, an increase of $9.1 million, or 23%, compared to $39.6 million in the prior year. The growth, for both the quarter and year to date periods, was led by increases in sales to the global cattle and companion animal markets, increased testing volumes with a large poultry customer and, to a lesser extent, revenues from the acquisition of Neogen Australasia, in September

18 Revenues Three Months ended February 28, Increase/ (Decrease) % (in thousands) Food Safety Natural Toxins, Allergens & Drug Residues $ 16,807 $ 16,453 $ 354 2% Bacterial & General Sanitation 8,992 8, % Dehydrated Culture Media & Other 10,511 10, % Rodenticides, Insecticides & Disinfectants 7,359 5,040 2,319 46% Genomics Services 3,976 2,725 1,251 46% $ 47,645 $ 42,949 $ 4,696 11% Animal Safety Life Sciences $ 2,769 $ 2,332 $ % Veterinary Instruments & Disposables 10,630 10, % Animal Care & Other 7,535 6,311 1,224 19% Rodenticides, Insecticides & Disinfectants 14,590 16,111 (1,521) (9)% Genomics Services 12,723 10,682 2,041 19% $ 48,247 $ 45,436 $ 2,811 6% Total Revenues $ 95,892 $ 88,385 $ 7,507 8% Nine Months ended February 28, Increase/ (Decrease) % (in thousands) Food Safety Natural Toxins, Allergens & Drug Residues $ 54,960 $ 53,090 $ 1,870 4% Bacterial & General Sanitation 27,435 25,340 2,095 8% Dehydrated Culture Media & Other 32,483 29,792 2,691 9% Rodenticides, Insecticides & Disinfectants 18,175 7,088 11, % Genomics Services 10,887 7,757 3,130 40% $143,940 $ 123,067 $ 20,873 17% Animal Safety Life Sciences $ 7,589 $ 7,261 $ 328 5% Veterinary Instruments & Disposables 32,804 29,281 3,523 12% Animal Care & Other 24,056 21,563 2,493 12% Rodenticides, Insecticides & Disinfectants 50,228 52,796 (2,568) (5)% Genomics Services 34,348 28,779 5,569 19% $149,025 $ 139,680 $ 9,345 7% Total Revenues $292,965 $ 262,747 $ 30,218 12% The Company s Food Safety segment revenues were $47.6 million in the quarter ended February 28, 2018, an increase of 11% compared to the same period in the prior year. For the nine month period, Food Safety revenues increased 17% to $143.9 million. Organic growth for the segment was 9% for both the quarter and year to date periods, with the acquisition of Rogama, occurring on December 21, 2016, contributing the remainder of the growth. Natural Toxins, Allergens & Drug Residues sales increased 2% in the third quarter; revenues for the year to date period increased 4%. Sales of dairy drug residue kits, used to detect the presence of antibiotics in raw milk, increased 29% in the third quarter as new products continued to gain share, particularly in international markets; for the year to date period, dairy drug residue test kit revenues rose 15%. Allergen test kit sales increased 14% and 13% in the three and nine month periods ended February 28, 2018, respectively, as product recalls relating to allergenic contamination of food continued to expand the market. Sales of test kits to detect the presence of natural toxins in grain crops decreased 17% in the third quarter. An 11% increase in aflatoxin test kit sales, due to moderate 16

19 outbreaks in U.S. and Brazilian corn crops, was offset by a 41% decrease in sales of deoxynivalenol (DON) test kits, as prior year outbreaks of DON in corn crops in the U.S., Canada and Europe did not recur in the current year. For the year to date period, sales of natural toxin test kits decreased 7%. Bacterial & General Sanitation sales increased 8% in both the three and nine month periods ended February 28, Within this category, the Company s AccuPoint sanitation monitoring product line increased 18% in the third quarter and 19% for the year to date period, on sales strength in both reader equipment and consumable supplies. Sales of test kits to detect pathogens increased 22% in the third quarter, led by strength in Listeria products, including the Company s new Listeria Right Now test kit that launched earlier in the fiscal year. The Company also benefitted from strong sales of equipment used with the Company s ANSR line of test kits to detect various pathogens, as the Company gained new customers; overall pathogen revenues increased 14% for the year to date period. Revenues for the Company s consumable product lines to detect spoilage organisms in processed foods decreased 2% in the current quarter but increased 3% for the nine month period. Dehydrated Culture Media & Other sales increased 1% in the third quarter. This category includes forensic test kits sold through the Company s Brazilian subsidiary. Demand for these kits from customers located in Brazil had increased dramatically in the prior year due to a new requirement for drug testing of commercial truck drivers, however, sales of these kits in Brazil have decreased in the current year as a result of increased competition and customer losses caused by conversion to different testing methods. In the third quarter, the Company s worldwide Lab M sales increased 21% and Acumedia sales increased 6%. Sales of Rodenticides, Insecticides & Disinfectants products sold through the Company s Food Safety operations increased 46% in the third quarter; the organic sales increase in this category was 29%. For the nine month period, sales increased $11.1 million; excluding first year sales of the Quat Chem and Rogama acquisitions, the year to date sales increase was 16%. In the third quarter, the increase was primarily due to Rogama shipping a large order resulting from a government contract; this sale is unlikely to recur in the next 12 months. The increase in sales was partially offset by termination of a distribution agreement in January 2017, which resulted in a decline in sales for those distributed products of $143,000 in the third quarter and $859,000 for the year to date. Genomics Services revenue recorded in the Food Safety segment increased 46% and 40% for the three and nine month periods, respectively, due primarily to growth of these services in Europe. Sales for the Company s Animal Safety segment were $48.2 million in the third quarter, an increase of 6% over the same period a year ago. Revenues for the nine month period increased 7% to $149 million compared to $139.7 million in the prior year. Organic growth in this segment was 5% and 6% in the three and nine month periods, respectively; the Neogen Australasia acquisition in September 2017 contributed the remainder of the growth. Sales of Life Sciences products increased 19% in the third quarter, partially due to order timing, and have risen 5% for the year to date period. The Company has increased volumes of forensic test kits sold to commercial labs in the U.S. Veterinary Instruments & Disposables revenues increased 6% and 12% for the three and nine month periods, respectively. For both periods, the increase is primarily the result of strength in detectable needles, syringes and animal marking products. Sales of Animal Care & Other products increased 19% in the quarter ended February 28, 2018, compared to the same period in the prior year; the year to date increase was 12%. The increase in the current year is due to market share gains of supplements for companion animals and vitamin injectables, and increased sales of vaccines to a large distributor; additionally, last year s results included sales credits totaling $1.1 million in the first quarter as the Company removed its canine thyroid product from its distribution channels, after the FDA approved a new drug application for a competitive product. Rodenticides, Insecticides & Disinfectants sales decreased 9% in the quarter and 5% for the year to date period, as the termination of a distribution agreement with a manufacturer of cleaners and disinfectants in January 2017 resulted in lost sales for those distributed products of $1.4 million in the third quarter of the current fiscal year and $3.9 million for the year to date period. These losses were offset by an 11% increase in rodenticide sales in the third quarter as the Company gained incremental business with several large customers; year to date sales rose by 9%. Genomics Services increased 19% in both the third quarter and year to date periods, respectively, each compared to the same period in the prior year. The growth for both periods was led by increases in sales to the global cattle and companion animal markets, higher volumes from a large poultry customer and, to a lesser extent, revenues from the acquisition of Neogen Australasia, in September Gross Margin Gross margin was 47.5% in the third quarter of fiscal 2018 compared to 46.3% in the same quarter a year ago. Gross margins for the quarter were positively impacted by lower costs inputs at the Company s genomics operations and favorable product mix towards higher margin diagnostic and animal care products; this improvement was somewhat offset by lower sales of mycotoxin test kits due to a prior year outbreak of DON in corn crops in the U.S. and western Europe, which did not recur in the current fiscal year. Gross margin